Adjusting Entries-Review-2-14-2025

Since businesses follow the Accrual Concept of accounting, entities must record transactions regardless of when the payment will be made. This concept results to adjusting the accounts at the end of the accounting period to keep it updated.

Accrued = Service Rendered but not yet paid

Deferred = Paid but not yet rendered.

Are expenses already incurred but not yet paid by the entity. Often supported by Billing Statement. This is recorded as an expense.

The most common example is Utilities Expense because this is often postpaid (paid after use).

These are expenses paid in advance and are expected to be consumed in their useful time. These are often treated as current assets because of their nature.

Examples are Prepaid Rent, Prepaid Insurance, and etc.

The entity already rendered the service but the client has not paid yet. This must be recorded immediately as revenue.

Is a revenue paid but not yet rendered by the entity. Since the customer already paid us, we are now being obliged to render the service that is why it must be treated as a liability that needs to be settled.

A contra-asset account used to diminish/reduce the amount of a Non-Current Asset. Since Assets are subject to wear and tear for being used and with that, their value decreases. Accumulated Depreciation represents the used/utilized portion or lifespan of the asset.

This is often partnered with an expense account

DEFINITION OF TERMS:

SALVAGE VALUE: Amount of the asset at end of its useful life.

USEFUL LIFE: Lifespan of an asset.

FAIR MARKET VALUE: Current amount of an asset (Book Value - Depreciation)

BOOK VALUE: Amount of the asset when it was acquired.

FORMULA:

DEPRECIATION = (BOOK VALUE - SALVAGE VALUE) / USEFUL LIFE

MONTHLY DEPRECIATION = DEPRECIATION / 12 MONTHS